Banking the unbanked

Insight: The consumer credit tightrope

Harry Hughes | ,

Many consumers use credit to make essential purchases despite having available funds, choosing to take advantage of reward programmes or protections. However, millions of customers use credit to purchase essentials due to a lack of other available funds. In 2018, the Adult Financial Capability Survey showed an estimated 9 million adults often use credit for food and bills.

This is credit by necessity and is an undesirable outcome for both the customer and lender. It may lead to fees and interest, and it will likely be unsustainable in the long-term.

It’s likely that the number of adults using credit for necessities has increased in light of the pandemic. Covid-19 has been a powerful reminder of how quickly customers can find themselves in financial difficulty.

But while many banking staff are comfortable recognising clear indicators, such as missed payments or entering unauthorised overdrafts, perhaps more subtle signs are being missed.

So, what can financial service providers do to identify financial difficulty and separate struggling customers from those who are trying to top up their air miles?

Confident conversations

Educating staff on how some customers use credit could help promote good conversations and address any concerns about asking seemingly awkward questions. Sometimes staff worry about questioning a customer’s credit usage because the customer may not be in difficulty, instead choosing to use credit for reasons other than necessity.

The key to confident conversations is to balance any questioning with the situation and to have staff who openly engage with customers using active listening skills. When there is already a potential sign of difficulty, for example, a missed payment or overdrawn account, then it is clearly appropriate to engage to better understand the customer’s situation.

It may be that the customer’s response makes sense and no further probing is required. When this occurs, it does not mean that the initial questioning was unnecessary.

Rather, the adviser has given themselves confidence that the customer is in a good situation and may encourage the customer to engage should future difficulties occur.

Insight through data

In addition to questioning, firms should also consider analysing credit usage to identify if customers are using it in an unsustainable way.

This could include looking at accounts that have gone into financial difficulty and reviewing whether there were missed opportunities for early identification. For example, analysis could show that an increased use of credit on essential spending was common before missing a payment.

This situation would demonstrate that questioning such use on the first line may help identify potential difficulties before they crystallise.

Customer communications

There are a number of options available to a firm when helping customers in pre-arrears or facing financial difficulty. These can include setting up payment holidays, interest freezes, or other forbearance measures.

Valuable support offered by firms is often non-financial, such as signposting to third-party organisations with specialisms in helping customers through specific challenges.

Many customers will be unaware of the support that firms can offer those in difficulty, instead worrying that if difficulties are discovered the outcome will be detrimental. Firms need to tackle this lack of understanding by promoting the support available and the value of self-disclosure.

As customers and their finances continue to be affected by coronavirus and the steps taken to counter it, firms need effective methods to identify and assist those in difficulty.

By looking at the use of credit on essential spending, financial service providers can consider whether they are currently utilising first line engagement and credit analysis in the best way possible.

Through staff education and customer awareness about the value of self-disclosure, firms can also increase the likelihood of early and successful engagement with those in difficulty.

Harry Hughes is senior insight and support manager at the Lending Standards Board